The pitfalls of a cryptocurrency pyramid scheme

  • “Malaysia is a hotbed for this kind of activity”
  • SC regulation important for investor protection


Source: Blocklime Facebook

THE recent charges brought against two men in Singapore for promoting a multi-level marketing scheme (MLM) involving the cryptocurrency OneCoin is an indication that the law is catching up with old-fashioned online scams dressed up in the new trappings of technology.

OneCoin was eventually revealed to be a ponzi or pyramid scheme that swindled an estimated US$2 billion (RM8.22 billion) from its victims, but what is the likelihood that Malaysian digital asset investors could also be at risk?

"(There's) lots of similar stuff to OneCoin taking place here," answered Mark Smalley, Neuroware CEO and founder who last year collaborated with the Malaysian Securities Commission in Project Castor, a test bed to create financial markets based on blockchains.

Smalley elaborated that in his opinion, most ICOs operating in Malaysia, as well as related initiatives such as cloud mining, were just fronts for more nefarious schemes. "Malaysia is a hot bed for this kind of activity."

OneCoin: Throwing good money after fake money

Although the OneCoin operation showed aspects of being a pyramid scheme, many were still taken in by the promise of heady returns of cryptocurrencies.

"(Such) assets are mostly highly volatile, not regulated, can be subjected to market manipulations," said Harpreet Singh (pic), Blocklime founder and chief executive officer as well as national committee member on ISO standards for Blockchain and Electronic Distributed Ledger technologies. "By having such assets backing the business operations, the risk becomes much higher.”

In fact, it was discovered that OneCoin was not even based on a blockchain and the company was generating OneCoins at will, as well as manipulating the apparent value of the currency.

OneCoin customers were told that they could only get coins by buying tokens and then submitting them for mining in server farms. According to the company, this was because it "(gave) everyone an equal opportunity to mine regardless of their knowledge of IT". However, these farms did not exist, and only served to create the illusion of demand. (Because the queue to mine was so long, users had to wait to get their OneCoins.)

Converting OneCoin to fiat was also very difficult. Customers could only do so if they bought a "trader package" which cost US$622 (EUR550; RM2,557) and even then trading was limited to the OneCoin Exchange (xcoinx), which had limits on how much could be sold at a time. Although prices rose from EUR0.50 to EUR30 throughout the life of OneCoin, In actual fact, the prices on xcoinx were completely under the control of the company.

Finally users were also encouraged to recruit new members through a referral scheme, and would be rewarded with bonuses if they did so - a basic MLM scheme.

However, in January 2017, the xcoinx exchange was taken offline for maintenance, and never came back up. OneCoin owners lost their only way of converting their coins to fiat currency.

Regulations to protect investors

Despite the obvious trappings of being a scam, OneCoin was phenomenally successful in persuading people to invest. "Many new investors are trapped by these scamsters by using all the buzz words (such as) 'bitcoin is booming', or 'Blockchain the next big thing'." said Harpreeet.

The Fear of Missing Out (FOMO) was real, and the sharp fall correcting cryptocurrency prices could be seen as a blessing, as it forced many of the scams to exit.

Because these scams give the whole space a bad name, Harpreet welcomes regulation to protect investors, such as the one recently touted by the Securities Commission.

In fact, the Securities Commission has been proactive in this respect. Just last September, the SC issued a notice for Dato’ Vida’s LaVida Coin to cease all promotional activities. Originally intended to raise RM .5 billion through an ICO which it would spend on building an entertainment channel, a payment gateway and and a mosque, the SC eventually decided to review it for “possible breach of securities law”.

"The Securities Commission Malaysia (SC) views the offering of any illegal investment schemes as a serious breach of securities laws," said a representative from the SC. "The public and investors must realise that they need to arm themselves with information and make relevant inquiries before investing in any schemes."

In order to help investors understand the risk of fraud, the SC has developed an investor education platform (, and queries can be directed to them at 03-6204-8999 or email at [email protected].


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